Tough choices tonight on the personal finance front.
I recently rolled over my 401k from eBay into an IRA. As a result, I now have the ability to better balance out my retirement portfolio across different asset classes.
In a previous post here, I discussed the launch of the first international REIT index ETF, the SPDR DJ Wilshire International Real Estate ETF (RWX).
Of course, in the months since then, a new fund has launched, provided by WisdomTree, the WisdomTree International Real Estate Fund (DRW).
The question is, which to choose?
Let’s assume first, for the purpose of this article, that we’re not going to debate whether or not now is the time to invest in real estate, international real estate, or whether ETFs are the right vehicle. Another time, another post. For tonight, the question is between these two funds.
Normally, picking ETF funds that track the same index is trivial – go with the one with lower expenses, unless the fund has a history of failing to track the index accurately.
However, when ETFs follow different indeces to track the same asset class, it gets a bit more complicated. In this case, there is a fairly radical difference in the two indeces that form the basis of these two funds.
I found this excellent table outlining the historical performance of the two on this Seeking Alpha post:
The first place anyone starts when comparing ETFs is performance, and here, it’s a mixed bag. For the 10 years ending March 31, 2007, the performance differential for the underlying indexes looks like this.
It’s worth noting that these returns are backtested, and do not reflect fees for the ETFs. But because the two ETFs have similar fees – 0.60% for RWX and 0.58% for DRW – the real-time returns should have been similar.
Mixed… DRW has lagged in the past 5 years, but is significantly higher over 10 years. Of course, this is backtested theory – neither fund existed that long.
In terms of the philosophy of the two funds, the question really outlines how truly you hold to indexing ideals versus value-philosophy in your investing. The SPDR is market-cap weighted, like the S&P 500 or the Wilshire 5000. The biggest percentage of the fund goes to the stock with the highest market cap. The WisdomTree fund is dividend-weighted. The biggest percentage of the fund goes to the stock with the highest dividend.
Personally, I’m normally biased towards simple, market-weighted indeces for the US market. However, deep down, I’m a value investor at heart, and the concept of dividend weighting, particularly in foreign markets where security enforcement may vary, is fairly appealing to me, especially in a dividend-focused asset class like real estate.
As another nod to DRW, the WisdomTree fund has both REITs (Real Estate Investment Trust) and REOCs (Real Estate Operating Companies) in it. Not all countries have the REIT structure, which originated in the US. As a result, DRW also has far more stocks (224) in it than RWX (154).
I found a lot of good articles comparing these two:
- Seeking Alpha: And Then There Were Two: WisdomTree Launches International REIT ETF
- Wisdom Tree: DRW Fund Details
- TheStreet.com: Play Foreign Real Estate With ETFs
- Motley Fool: International Land-Rush ETFs
In the end, I was very close to just splitting my cash between the two funds. That might actually be the right answer if you have sufficient assets. However, I decided that since the real estate market has been anything but value oriented for the past five years, my bias is towards the WisdomTree approach for this asset class.
If you are interested in these funds, I suggest you read all the above material yourself. Post here if you reach a different conclusion – I’m interested to know why.
P.S. In case you are curious, I went with a straight, market-weighted index (Vanguard REIT Index ETF, VNQ) for the US REIT portion of the portfolio.
2 thoughts on “Tough Choice: Picking an International REIT ETF”
Also, it appears DRW is more heavily weighted towards the non-Western countries (Hong Kong, Singapore, Australia), which would allow you beef up any short-comings you might have in emerging market diversification (assuming you believe there’s a strong correlation between RE and the rest of the economic indicators of these countries).
Personally, I like my Vanguard REIT index fund (), with it’s 0.21% expense ratio… 🙂
I used the Vanguard REIT Index for my US exposure. I split my REIT exposure 50% US, 50% International, using WisdomTree for the International piece.
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